Goldman Sachs New Operating Environment

Goldman Sachs, the long time home of former Secretary of State, Hammering Hank Paulson, is moving forward on a slippery slope of financial survival. The good old days are over, never to return.

The damage rendered to the world’s economy and financial system by the toxic brew of derivative financial instruments conceived and unleased upon the world by Goldman Sachs and other Wall Street investment banks is beyond measure. Losses are already in the trillions yet there are likely even more trillions of losses to come.

The resulting financial carnage has destroyed the investment banking industry. Lehman Brothers was alllowed to fail. Bear Sterns was “rescued” by a government bailout, The shell of Merrill Lynch was given burial by a hastily arranged marriage to the ailing Bank of America, and Morgan Stanley and the once proud Goldman Sachs had to give up their investment bank status and arrange for commercial bank licences. The investment bank profit machine has been broken beyond repair. Goldman Sachs will never return to the level of profitibility that it once enjoyed.

During 2009 an almost total breakdown of the financial system will occur. This process is already well underway as the black hole of a compressive deflationary deleveraging of trillions of dollars of debt accelerates. As the process is geometric the destruction of capital will far outpace the government’s ability to re-inflate the economy. Bailout after bailout will cause the treasury to print money it doesn’t have. Initially the flood of “new money”, or what the treasury hopes will pass for money, will have little effect. The deflation will continue.

However, once the forced liquidation of debt and the liquidation and resultant destruction of the value of assets, such as houses, commercial real estate, stocks, art works, collectibles, commodities of all sorts including oil has run its course, the trillions of dollars in fiat money thrown at the deflationary problem will have severe unintended consequences.

Probably the economy will rapidly move from deflation to hyper inflation as people realize the world over that the flood of trillions and trillions of new dollars has no real value and only postponed the death of large inefficient poorly managed companies. Who can believe that an effective nationalization of our financial system and what’s left of our manufacturing base will in the long run be good for the American economy?

The whipsaw effect of a deflationary economy moving to hyperinflation will be a catastrophe of the first order. People holding only US dollars as assets will be wiped out in a hyperinflationary environment as the paper becomes nearly worthless.

Goldman Sachs is not immune from the financial meltdown under way worldwide. While Goldman Sachs reported 2008 earnings per common share of $4.47; fourth quarter loss per common share was $4.97. Goldman has finally began to realize the decline in value of its poor investments in the sub prime mortgage sector and the collapse of the mergers and acquisitions market. Alas, even Goldman couldn’t resist taking toxic assets onto its own books rather than dumping them on trusting investors and collecting fees and commissions.

Note the decline in income for 2008 compared to 2006 and 2007. While still showing a profit for the year 2008 with a loss of $4.97 for the fourth quarter the horrible conditions of the credit markets are beginning to bite even Goldman Sachs. The figures are from Goldman’s website in a PDF file of the 2008 K-10 document filed with the SEC.

2008 2007 2006

Year Ended November

Investment Net revenues . . . . . . . . . . . . . . . $ 5,185 $ 7,555 $ 5,629

Banking Operating expenses . . . . . . . . . . 3,143 4,985 4,062

Pre-tax earnings . . . . . . . . . . . . . $ 2,042 $2,570 $1,567

Trading and Principal Net revenues . . . . . . . . .$ 9,063 $31,226 $25,562

Investments Operating expenses . . . . . . . . . . 11,808 17,998 14,962

Pre-tax earnings/(loss) . . . . . . . . $ (2,745) $13,228 $10,600

Asset Management and Net revenues . . . . . . . . .$ 7,974 $ 7,206 $ 6,474

Securities Services Operating expenses . . . . . . 4,939 5,363 4,036

Pre-tax earnings . . . . . . . . . . . . . $ 3,035 $ 1,843 $ 2,438

Total Net revenues . . . . . . . . . . . . . . . $22,222 $45,987 $37,665

Operating expenses (1) . . . . . . . . 19,886 28,383 23,105

Pre-tax earnings . . . . . . . . . . . . . $ 2,336 $17,604 $14,560